ODYSSEY MARINE EXPLORATION INC quarterly report, Q2 FY2023

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Odyssey Marine Exploration, Inc. — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2023; filed August 14, 2023. The interim financial statements are unaudited. Odyssey is a smaller reporting company focused on marine services and subsea mineral exploration projects.

Financial position and operating metrics

  • Revenue: Second-quarter revenue was $172,575, down 55.8% from $390,278 in the prior-year quarter. Six-month revenue was $461,314, down 33.1% from $689,884. CIC, a related party, represented 100% of revenue in both six-month periods.
  • Profitability: Second-quarter operating loss was $3.15 million, compared with $3.13 million in the prior-year quarter. Net loss attributable to Odyssey was $5.72 million, or $0.29 per basic and diluted share, compared with a $4.68 million loss, or $0.30 per share.
  • Year-to-date results: Operating loss was $6.52 million versus $9.81 million in the prior-year period. Net income attributable to Odyssey was $10.88 million, or $0.55 basic and $0.54 diluted EPS, compared with a $12.91 million loss, or $0.86 per share. The improvement was primarily due to a $21.18 million gain on debt extinguishment.
  • Margins: The second-quarter operating margin was approximately negative 1,823.6%; the six-month operating margin was approximately negative 1,414.4%. These ratios reflect very low service revenue relative to operating costs.
  • Cash flow: Six-month operating cash use was $7.37 million, compared with $2.75 million in the prior-year period. Investing activities provided $942,412, primarily from a $1.0 million note repayment, partially offset by equipment purchases. Financing activities provided $6.81 million.
  • Liquidity: Cash and cash equivalents were $1.83 million at June 30, 2023, compared with $1.44 million at December 31, 2022. Working capital deficit was $35.7 million. Current liabilities were $40.27 million versus current assets of $4.52 million.
  • Debt: The balance sheet reported loans payable of $40.93 million, including $2.22 million current and $38.71 million long term, compared with $46.74 million at year-end. Management separately described financial debt as $36.8 million at June 30, 2023. Accrued interest was $29.72 million.
  • Equity: Total stockholders’ deficit was $65.02 million, compared with $76.54 million at December 31, 2022. Shares outstanding were 19,981,901 as of August 8, 2023.

Material changes from the prior comparable period

  • Revenue declined due to lower marine research and project-administration services.
  • Second-quarter marketing, general and administrative expense decreased 20.5% to $1.82 million, while operations and research expense increased 21.9% to $1.50 million.
  • Six-month operations and research expense declined 47.7% to $3.29 million, primarily because of lower litigation-financing costs.
  • Odyssey settled and terminated the MINOSA debt in March 2023 by paying $9.0 million in cash and issuing 304,879 common shares for a portion of the debt. The transaction generated a reported $21.48 million gain on debt extinguishment.
  • Odyssey issued the DP SPV note, with $13.1 million advanced in March and an additional $450,000 advanced in the second quarter. The note bears 11% interest, is secured by substantially all assets, and matures September 6, 2024 unless redeemed earlier. It was issued with warrants for up to approximately 3.47 million shares at $3.78 per share.
  • Odyssey completed $3.5 million and $1.0 million marine-equipment sale-leaseback financings in April and June. The transactions were accounted for as financing arrangements rather than sales.
  • Odyssey obtained a $1.0 million 37North note on June 29, 2023. It matured July 30, 2023 and includes repayment premiums and potential conversion features that may result in equity issuance.

Outlook, risks and unusual items

  • Going concern: Management stated that substantial doubt exists regarding the Company’s ability to continue as a going concern. Operations for the next twelve months depend on additional financings, monetization of receivables and equity interests, project development, exploration-charter income and collections.
  • Management expects current financing proceeds and anticipated cash inflows to provide operating funds through 2024, but stated that failure to generate sufficient cash would require a curtailed-expense and reduced-activity business plan.
  • The NAFTA arbitration claim against Mexico seeks more than $2 billion. The evidentiary phase is closed and the tribunal is deliberating; the timing and outcome cannot be predicted. Litigation financing had a $24.85 million face value at June 30, 2023.
  • Odyssey’s business remains highly concentrated: CIC generated all reported revenue for the six months ended June 30, 2023 and 2022. CIC-related accounts receivable and notes receivable totaled approximately $696,000 at June 30, 2023, and Odyssey held a $4.84 million investment in CIC.
  • Odyssey committed to acquire a 13% interest in Ocean Minerals, LLC for up to $15.0 million. The initial closing occurred July 3, 2023 for $1.0 million in cash and the transfer of Odyssey Retriever, Inc., valued at $5.0 million. Additional closings and optional purchases could increase Odyssey’s interest.
  • Consultants may receive contingent success fees of up to $700,000 upon approval and issuance of an environmental impact assessment for the Mexican subsidiary; no liability was accrued because approval had not occurred.
  • Disclosure controls were not effective as of June 30, 2023 because of a material weakness involving technical accounting resources and review of significant transactions and footnote disclosures. Management initiated remediation, but the weakness had not been remediated as of the filing.
  • The filing provides no formal revenue, earnings or cash-flow guidance. Management’s outlook is dependent on financing, asset monetization, project milestones, regulatory approvals and potential arbitration proceeds.

Investor verification checklist

  • Reconcile the $40.93 million loans-payable balance in the financial statements with management’s separate $36.8 million financial-debt figure.
  • Confirm the status, repayment or conversion of the 37North note, which matured after the reporting date.
  • Monitor cash burn, financing availability and whether the Company can fund operations through 2024 without additional dilutive or secured financing.
  • Assess the potential dilution from the DP SPV warrant, other warrants, convertible instruments and the Ocean Minerals equity-exchange provisions.
  • Track the NAFTA arbitration decision, litigation-financing obligations and any potential recovery or settlement.
  • Evaluate collection and counterparty risk associated with CIC, including the related-party services agreement, receivables and investment valuation.
  • Review the progress and funding requirements of the Ocean Minerals acquisition and other exploration projects, including required environmental and regulatory approvals.
  • Confirm remediation of the material weakness in internal control over financial reporting in subsequent filings.